Problem

Orderbook-based exchanges are currently dominating DeFi, with volumes and user numbers growing at a high rate. A critical factor in an orderbook exchange’s success is the liquidity it can attract, yet many current liquidity models are inefficient, limiting DeFi's full potential.

Traditionally, order books rely on sophisticated participants known as market makers, who play a crucial role in ensuring traders can transact smoothly on an exchange. Market makers maintain liquidity by continuously quoting bid and ask limit orders, adjusting prices quickly in response to market conditions and changes in their own inventory. These strategies are both complex and challenging to execute profitably, yet they are essential for the success of an exchange and the experience of its traders.

However, most market makers require private retainers and credit lines from exchanges to cover their costs. This includes 1) compensating for the opportunity cost of the liquidity they commit, 2) covering the significant overhead costs associated with market making, and 3) achieving profitability. These dependencies make market-making an expensive proposition and can misalign the incentives between the exchange and the market maker. Currently in DeFi there are few common models to attract market making liquidity:

• Private retainers with market makers are expensive to an exchange and potentially token-holders. These retainers are fundamentally misaligned with an exchange. If paid in tokens, then the retainers will result in a downward pressure of the token, as the market makers are not aligned to stay on the exchange.

• A common practice on centralised venues is the provision of "credit lines" to market makers. These are essentially legal contracts where an exchange will give market makers money to perform their strategies on an exchange. This is difficult to do in DeFi, as legal contracts are not the base trust assumption.

• Public rewards attract mercenary capital, and for order book-based exchanges are completely inaccessible to retail participants due to the large overhead associated with running low-latency market making strategies.

Current solutions do not address the problem and are substantially inferior to the performance of a regular market maker, unless the solution is given an edge which would directly penalise traders.

In the current world of DeFi order book-based market making, it looks identical to TradFi with greedy institutions taking advantage of retail traders or insiders given the lion's share. Rysk v2 changes that, removing disgusting TradFi practices and properly aligning incentives between LPs, traders, market makers and exchanges. A quadrilateral win.